In: Economics
Solution:-
Discount rate is the rate at which banks borrow from the Federal Reserve, hence a lower discount rate reduces the costs of borrowing by banks from the Fed and thus increases the amount banks would borrow from Fed
In the 2nd case if Fed buys $400 million worth of treasury bonds from Chartered banks, in return it would release $400 million to other banks. Thus the banks’ lending increases by $400 million.